Technical Speculator ...your financial market review

Are gold prices really bottoming? That all depends on the indicator.

Holding gold has largely been about a hedge for inflation, weak US dollar or a store of safety during times of trouble. At present, it is the inflationary pressures that is the main driving force for the yellow metal.

Inflationary pressures are building around the world as the global economy tries to reopen.  Consumer prices are sharply rising with the US Inflation rate posting a three-decade high of 6.2% in October and Germany hitting 4.5%, the highest level since 1993.

  But, as these fears of rising inflation have dulled the risk appetite and boosted demand for the safe-haven metal for many investors, the advancing dollar is pulling at the heels of the gold market and limiting its upside (Chart 1). 

The greenback has formed a base back in the first half of 2021 and recently broken out of that base. Now trending higher, models point to $0.96 as the next target.

Another factor that can take some of the bullishness out of gold market are the yields in the US bond market.  The 10-year T-bonds yields have a close opposite correlation to the yellow metal since 2019.  Since mid-2020, the trend for these mid-term yields has been up.  There has been some stalling at the 1.66% to 1.74% range and that pause appears to have aided gold prices short-term.  

The last indicator (Chart 2) shows that gold prices are more aliened to US Consumer Inflation Expectations than to the US Inflation Rate itself.  But since 2021, there has been a slight separation growing, suggesting that consumer inflation expectations may have gotten ahead of gold prices. 

Bottom line: At present, gold prices appear to be winning the battle against the rising US dollar and advancing US 10-year T-bond yields. We suspect that these last two elements will eventually limit the upside strength in gold. 

Models point to $1875 as a peak for gold.

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